Lessons · Accounting · a surplus is not a profit
A surplus is not a profit
When income exceeds expenditure the difference is a surplus. It belongs to the organisation's purposes, not to any owner, and much of it may be restricted. It is not evidence that the organisation is doing well and it is not money anybody may take out.
Hone is a place to practise a career, one idea a day. This is one of its lessons, written out in full and free to read without an account.
In beta. This lesson was written for Hone and has not yet been checked by a qualified accountant. Practice material, not professional advice. What that means.
What it is for
The word invites the commercial reading, and the commercial reading causes two opposite errors. Outsiders see a surplus at a charity and conclude it is hoarding or overcharging; boards see one and feel comfortable, when a large part of it may be restricted to purposes with nothing to do with the bills falling due.
How to think about it
Split any surplus by whether it is restricted before saying anything about it. Then ask what it is FOR. A surplus held deliberately as a reserve is a decision; a surplus nobody planned is a question.
Worked example
Income exceeds expenditureA surplus.
No owner takes it outIt stays with the organisation's purposes.
Part of it may be restrictedAnd so unavailable for general costs.
A planned reserve and an accidental surplus are differentOne is a policy, the other is a question to answer.
Your turn
Name what you must split a surplus by before interpreting it.
Split a surplus by whether it is before saying anything about it
Solve one, graded on the server
The trap
Treating a surplus as spare capacity. The unrestricted part may be a deliberate reserve, and the restricted part is not spare at all, however much it looks like a cushion on the face of the accounts.
Now you try
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